The prospect of negative rates and negative long-end yields in the US has gone from “far-fetched” to “likely” in a pretty short period of time.
Over the past year or so, Europe has found itself vulnerable to the derisive “Japanification” label amid anemic inflation which refuses to pick up sustainably despite negative policy rates and a fixed income market that looks like it walked out of a Salvador Dalí print.
With yields now deeply negative on core and semi-core EGBs and with roughly half of the Euro IG credit market negative-yielding, the inevitable spillovers are helping to push yields lower in the US despite punitive hedging costs.
“It is no longer absurd to think that the nominal yield on US Treasury securities could go negative”, Pimco’s Joachim Fels wrote last month, adding that “whenever the world economy next goes into hibernation, US Treasurys – which many investors view as the ultimate safe haven apart from gold – may be no exception to the negative yield phenomenon”.
“If the trend since 1980 in G4 policy rates continues, we might see -4% in 2030”, Nordea remarked not even half-jokingly last week. “The trend in the German 10-year yield since 1980 suggests it might reach -2%” by then.
If you were curious to know what Alan Greenspan has to say about this, you’re in luck. Asked about the possibility of negative rates stateside during an interview with CNBC on Wednesday, he said it’s “just a matter of time”. Here’s the clip:
(If the video does not load, please refresh your page – full clip here)
“Well, first of all, what it signifies is that the world population is aging”, Greenspan said, at the beginning of a lengthy demographics-based explanation of falling yields.
Ultimately, Greenspan’s conclusion was that “you’re seeing it pretty much throughout the world [and] it’s only a matter of time before it’s more in the United States”.
The only question is what the definition of “more” ends up being, because if Europe is any indication, you’ll be paying Apple for the privilege of loaning the company money in no time.
On the bright side, the next administration (or maybe even the current one) will be able to borrow for free, which is going to come in really handy given the rather “deplorable” budget position the country is in thanks in no small part to the current president’s pedal-to-the-metal fiscal profligacy.
Now when do we issue the zero coupon century bonds?